Coherent Corp (COHR) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent Q3 '09 earnings conference call hosted by Coherent, Inc. (Operator Instructions). I would now like to introduce Ms. Helene Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Thank you, Britney. Good afternoon, and welcome to our fiscal 2009 third quarter conference call. On today's call, I will provide financial information; and John Ambroseo, our President and CEO, will provide a business overview. As a reminder, any guidance and any statements in today's conference call pertaining to future guidance, plans, events, performance are forward-looking statements that involve risks and uncertainties, and actual results may differ significantly. We encourage you to refer to the risk disclosures described in the Company's reports on Forms 10-K, 10-Q, and 8-K as applicable, and as filed from time to time by the Company. These forward-looking statements are subject to the Safe Harbor Provisions of the Private Securities Litigation Reform Act. The full text of today's prepared remarks, which will include references to historical bookings and sales by markets, will be posted on the Coherent Investor Relations website. A replay of the webcast will be made available for approximately 90 days following the call.

We reported third quarter revenues of 98.5 million and a GAAP loss of 7 million or $0.29 per share. On a pro forma basis, the third quarter net loss was 2.2 million or $0.09 per share. The GAAP to pro forma pre-tax reconciliation items include 4.9 million restructuring costs primarily from our footprint consolidation efforts, 1.5 million stock related compensation expenses, and .1 million litigation charges resulting from the internal historical option investigation. Cash flow from operations was solid at 11 million, and our ending cash balance was approximately 222 million. Our headcount at the end of the third quarter stood at 1,736, which reflects a reduction of 100 people compared to last quarter and a reduction of almost 500 people or 22% when compared to the headcount a year ago. We are executing according to our plans with respect to the footprint reduction program.

During the quarter, we completed the closure of our Munich facility. In addition, last week, ahead of our initial schedule, we exited the St. Louis facility, we vacated the lease building in San Jose, California, and we consolidated sales offices in Japan. We are now focusing on the last leg of the footprint reduction plan, which is the exit of Finland. We anticipate completing the closure of Finland by the end of fiscal 2010, at which point the cumulative benefits will reach the high end of the previously announced savings range of 11.5 to 14.5 million. The Finland exit requires establishing manufacturing capabilities of the core technology in the Bay Area, while in parallel maintaining the existing capacity in Finland. This will temporarily result in higher costs during fiscal 2010, masking the incremental savings from some of the more recent closures.

We will end the current fiscal year with annual run rate savings of approximately 8 million; and once the Finland project is completed beginning fiscal 2011, annual savings will step up to be about 14 million. Net sales for the third quarter declined 6.6% sequentially and 37.3% from the same quarter a year ago. On a regional level, we see no major shifts. On a trailing 12 month basis, U.S. represents 34% of the total volume, Asia 32%, Europe 28%, and other countries 6%. From a market perspective, microelectronic sales increased sequentially, which is mainly the result of higher solar and flat-panel display revenues. The remaining three markets experienced sequential declines with bioinstrumentation, material processing and medical showing the largest impact.

Company sales by significant market applications for the third quarter are as follows. Scientific, 30.1; microelectronics, 30.3; material processing, 12.6; OEM components and instrumentation, 25.3, for a total of 98.5 million. The third quarter gross profit was 33.6 million or 34.1% of sales. On a pro forma basis, excluding 2.6 million restructuring costs and .2 million stock compensation charges, gross profit was 37%. The sequential pro forma decrease of 370 basis points from 40.7% last quarter was primarily due to a negative product mix, coupled with the impact of lower production volumes, in part also due to our inventory reduction efforts. The decrease of 830 basis points compared to the third quarter last year's pro forma margin is primarily due to a significant drop in production volumes and an unfavorable mix from lower revenues in the microelectronics and medical markets, and a higher percentage of revenues in the scientific markets.

These declines were partially offset by the benefits of labor and overhead spending cuts and a favorable impact of a weakened Euro. Compared to the third quarter last year, we reduced inventories by 14.4 million or 12%, and revenues declined 37%. (Inaudible) expenses of 46.7 million include restructuring, litigation and stock and deferred compensation charges, for a combined total of 6.4 million, resulting in an adjusted pro forma expense of 40.3 million. This compares to 42.1 million adjusted pro forma spending in the previous quarter. The sequential decline of 4% is mainly the result of incremental benefits from the Munich closure, coupled with general cost containment measures.

Using a similar definition of pro forma expenses, total expenses declined 14 million or 26% when comparing to the third quarter last year. The above comparisons exclude the impact of the changes in our deferred compensation plan liabilities. As you may have seen in prior quarters, the volatility in the stock market caused significant expense fluctuations, resulting in misleading trended information. We have added a footnote in the press release displaying the impact of these non-cash charges and/or benefits for all relevant periods presented. Please refer to Footnote E.

Our cash and cash equivalents balance for the quarter was approximately 222 million, representing a sequential increase of 15 million. Cash flow from operations for the quarter was 11 million net of restructuring cash outflows of roughly 5 million. Accounts receivable DSO remained at 69 days when comparing to the previous quarter. Despite the sequential revenue decline, we reduced inventory levels by 7 million, offset by a currency impact of 2 million due to a stronger Euro. (Inaudible) stocks to mitigate the risks associated with the footprint project stood at 6.2 million at the end of the third quarter. Capital spending for the quarter was 3.6 million or 3.6% of sales. As indicated before, a significant portion of this fiscal year's capital spending relates to the footprint consolidation projects. Based on the third quarter bookings, we anticipate revenues in the fourth quarter to be in the range of 90 to 100 million, with a pro forma gross profit percentage similar to the third quarter.

As we indicated during the last conference call, we are burning off inventory that was built in the past six to nine months at a higher cost, and this will negatively impact our gross margins. Stock compensation charges for the fourth quarter are projected to be 1.5 million, unchanged from the third quarter. As we have completed most of our footprint projects, the fourth quarter restructuring cost will be lower and are estimated to be in the range of 2 million, of which 800,000 will be recorded in cost of sales, 900,000 in R&D and 300,000 in SG&A. I will now turn over the call to John Ambroseo, our President and CEO.

Thanks, Helene. Good afternoon, everyone, and welcome to our third fiscal quarter conference call. In a challenging macroeconomic environment, Coherent delivered on several key goals for the third quarter. Sales were at the higher end of guidance, although mix was skewed towards lower margin products. We did a good job on cash generation and inventory management. We also completed another major component of our consolidation by exiting our Munich facility. While I commend our team for their efforts, we mist turn use to march forward. Our attention remains firmly fixed on customer and market alignment, design wins, execution and asset management.

Orders in the third fiscal quarter totaled $88.6 million, which were down 5.5% sequentially and 40.5% versus the prior year period. The book-to-bill for the quarter was 0.9. Orders of 28.3 million in the scientific market were down 10% from the prior quarter and 4.8% versus the prior year period. Third quarter orders benefited from strong demand for lasers used in biological imaging, resulting in record orders for our Chameleon Series lasers. More than a third of the Chameleon versions were for the newest version, the Chameleon Vision, introduced in January 2009. There is growing optimism regarding the deployment of stimulus money in the second half of the calendar year. Unfortunately, numerous customers in the U.S. and Japan delayed placing orders in the June quarter since stimulus funds could offer greater spending flexibility. We echo everyone's sentiment to get the funds flowing. We introduced several new products for the research market during Q3. Our (Inaudible) Verdi product line has been augmented with two OPS base lasers, the Verdi G2 and G5, which boast higher liability and long operating lifetimes. The G2 and G5 produce 2 watts and 5 watts of green light, respectively, and can be used for direct illumination or pumping applications.

In conjunction with this launch, we showed power scaling to 40 watts of green light in an OPS (inaudible), which will lead to future higher power Verdi G-Series products. We also demonstrated new versions of our Legend Amplifier series that will be formally released in the next three to six months. Orders of $25.6 million for instrumentation and OEM components were up 20.3% from the prior quarter and down 33.2% versus the prior year period. The sequential increase in orders was paced by a large contract buy from a key instrumentation customer, the capture of a competitive medical OEM account and an uptick in defense business. The large contract order notwithstanding, the instrumentation market is in a holding pattern until stimulus money starts to flow. The emphasis between now and then is bundling of multiple light sources into a light engine that can support a variety of test protocols. Our position in the ophthalmic market has strengthened as more customers are qualifying our OPS-based Genesis lasers for photocoagulation treatment, including six of the top vendors in the space. We will be very well-positioned as this market recovers.

Bookings from microelectronics of 21.9 million, which included a 3.4 million debooking, decreased 19.7% sequentially and 62.2% versus the prior year period. During this earnings season, the common theme within the semi cap space is improved factory utilization rates. We are receiving similar input, which bodes well for service revenue, as users recommission idle equipment. We are also seeing improved conditions in new tool development. As long as these conditions hold, orders should start to recover in the current quarter. Advanced packaging orders doubled compared to the second quarter and were up for the first time in three quarters due to inventory replenishment for existing products and technology buys for the next generation tools. We're not prepared to declare that this submarket is in recovery, since some customers still need to burn through their finished goods inventory. When recovery does occur, our current and planned products will be well aligned with customer needs around capability, throughput and yield.

At the multiple system orders in the March quarter, third quarter bookings for flat-panel display manufacturing were all service related, as many users are back to 80 to 90% utilization rates. History tells us that at these rates, users need to plan for additional capacity, and those conversations are underway. Bookings for solar cell manufacturing remain under pressure, as oversupply and consumer spending weighs on end-user pricing and demand. As one might expect, there's tremendous emphasis on cost per generated watt through material and process cost reduction, and increasing cell efficiency. Glass and silicon foundries are addressing the raw material side of the equation, while equipment suppliers are focusing on reducing process costs and enhancing conversion efficiency.

This has driven laser sales for Coherent, particularly in the crystalline silicon market, where customers are adopting laser technology in many cases for the first time and are asking for more functionality to investigate process windows required for production adoption. In response to these requests, Coherent has designed process development tools for crystalline silicon solar cells that can be equipped with any number of lasers in our portfolio for different applications, including dielectric abrasion, edge isolation and dopant diffusion. We've already shipped R&D and pilot production units with impressive results, with up to 15% improvement in conversion efficiency being realized. To date, this has been a very concentrated effort. We will be exhibiting our tools to the broader solar industry next month at the 24th European Photovoltaic Solar Energy Conference and Exhibit in Hamburg at the end of September.

Material processing orders of 12.8 million decreased 7.3% sequentially and 44.3% versus the prior year period. Last quarter, I reported that Chinese customers were re-engaging in the sales process, and this led to a modest recovery in orders in China. Judging by the power and type of lasers ordered, it appears that marking and non-metal cutting have rallied in Q3. What is not clear is whether the orders were to support domestic demand or the export market. It should further be noted that these orders were largely at the lower end of the power scale, supporting the notion that low cost manufacturing may be stabilizing. We're seeing a similar trend in Europe where low power applications posted reasonable results.

As the market works its way towards a recovery, we are working to expand our addressable market through the introduction of a suite of high powered lasers for materials processing. Earlier this year, we released the HighLight 1000F, a fiber deliver semiconductor array for use in heat treating, (inaudible), welding and other applications. At Lasers Munich, we introduced the E-1000 a sealed CO2 laser that delivers one kilowatt of power in a package that's up to 80% smaller than competitive offerings, does not require a gas supply; and because of its superior beam quality, can cut metal at speeds equal to or faster than competitive 2-kilowatt lasers. The compact size and relatively low weight allows the E-1000 to be mounted directly to a robotic workstation, which simplifies beam delivery optics. We expect to deliver prototypes this calendar year, and production units will ship early in calendar 2010. We also displayed a concept design for our 1 kilowatt fiber laser based on bar pumping.

We chose bar pumping not to be different from everyone else, but rather to address simple economics. In high power fiber lasers, the pump diodes account for roughly half the material costs. The cost of diodes is divided between the chip and the can. Given the differences in output power between single emitters and bars, you need far fewer bars to achieve the same output power. We expect to ship prototypes next year. Helene has already reported on the progress of our consolidation efforts, and I'd like to add my own commentary. This has been a significant undertaking, involving the relocation of just over 20,000 total part numbers, including approximately 2,800 salable part numbers between Coherent locations and/or contract manufacturers. There was little to no impact on customer supply chains. Quality and reliability did not suffer, and yield slightly improved.

This would have been a solid accomplishment in a normalized economy; but was an impressive result, given that much of the project was done during a period of declining revenues and diminished resources. With the exit of (Inaudible) in St. Louis completed ahead of schedule, we have one remaining project -- the spin up of our new (Inaudible) growth facility in Sunnyvale, California, and the subsequent closure of our current facility in (Inaudible), Finland. This is a very important program, as semiconductor devices are used in roughly 40% of the Company's revenue, either in direct sales or components of larger systems. This project is on track and will run through fiscal 2010. With certain end markets appearing to stabilize and good customer engagement, we believe bookings will begin to recover in the September quarter and continue through fiscal 2010.

Over the next several weeks, Helene and I will participating in three investor events, including the CJS Securities Conference in White Plains, New York on August 18th, the Longbow Research Conference in New York on September 10th, and the Deutsche Bank conference in San Francisco on September 16th. Our presentation materials will be available on August 17th under the Investor tab on Coherent's website. I'll now turn the call back over to Britney for the Q&A session.

Thank you. Our first question comes from the line of Larry Solow with CJS Securities. You may proceed.

Hi, good afternoon, guys. John, it sounds like you're seeing some mix trends and mix singles in the market -- and I guess it's anybody's guess on when the economic recovery actually does take place -- but maybe you could discuss a little bit more on how you're improving your positioning and trend and design wins, and client interest in your new products that you've been unveiling?

So Larry, as I mentioned last quarter, the dialogue with customers has certainly improved in the last six months as people are starting to see some light at the end of the tunnel. We are tracking design wins. We don't disclose that number publicly for a variety of different reasons; but the emphasis for us is not only to make sure that we're executing against our footprint project, which obviously is important from a margin perspective, but to make sure we have the right alignment going forward. And customers in particular are looking at their markets and determining that they need new tools to be able to either maintain or extend market share positions and they are turning to us in many of those cases. So as you look at, for example, the E-1000 CO2 laser that we just showed for the first time at Lasers Munich, the response from the European laser users was quite good, and we've established a priority lease within the European theatre for who is going to be evaluating the systems and working with us as we tighten up the final package design.

The same kind of feedback came from the fiber laser that we showed, even though we're a relatively late entrance, customers are looking for things that are going to change the game. The expectation, I think, is that most of the credible vendors in the space will be able to meet the performance specifications and reliability demanded in the fiber laser market, and they're looking for game changers in terms of overall cost of ownership, and at least what we spoke about resonated with them. With respect to how we're doing in the microelectronics market, which has historically been one of our stronger markets, we are keeping very close pace with customers. The fact that we've brought out new versions of a variety of different tools -- for example, we brought out a product called the Mamba, which is a big honking laser that puts out a lot of power for applications and dielectric abrasion and others, so we are hitting our marks on a pretty routine basis right now. We do need recovery in the end markets to enjoy the economic benefits that come with that.

Okay, then maybe a question for Helene. It sounds like in terms of SG&A and future benefits, it sounds like we could kind of be in a holding pattern for the next few quarters? Does that kind of make sense, as some of your savings offset some of your duplications in Finland?

Larry, that is correct. As I explained, we will see some doubling up of costs because of that (Inaudible) project, the exit of Finland, and so there will be some slight improvement. It's not a complete wash, but the majority will come as soon as we finish Finland.

And then on the gross margin also, I guess you guided Q4 similar to Q3, and then do you think you're getting close to running through your higher cost inventory, or -- ?

Well, we haven't given any guidance for fiscal '10 yet. I remember I said six to nine months, and I made that comment last quarter.

Okay, okay. And then just last question, I know there was one -- you mentioned one cancellation in the microelectronics market. Was that the only cancellation, and is that, I guess, sort of a stable-type thing, or is that out of the ordinary?

We called it out, Larry, because it was an order from a single customer, and therefore we thought it was noteworthy. I would say that the trends among the rest of the customer base are pretty much constant or consistent with what we've seen in the past, and we do continue to scour the backlog to make sure that it is as up-to-date as possible.

Okay, excellent. Thanks a lot, and we look forward to seeing you guys in a couple of weeks at our conference.

Our next question comes from the line of Mark Douglas with Longbow Research. Go ahead.

Hi, John and Helene.

Hi, Mark, how are you?

Hi, Mark.

Fine. John, can you go into the negative mix again? Can you explain what the product mix was that was creating the drop in gross margin,s and do you have an estimate as to how much of the gross margin drop was due to that? And then, what do you see kind of going forward in your guidance, and is that still baked into your guidance for fourth quarter?

Mark, it's Helene. I would say that definitely 50% of our drop, if not slightly more, related to the negative mix. It's in a variety of places. For example, I think we also highlighted the medical business was significantly less than what we saw the prior quarter, and we typically enjoy higher margins there. Also, within our service business, there was a mix within the markets, and so there is -- we had more service business in the lower margin markets compared to last quarter. Those are the two predominant ones. And then there is a variety of -- it just happens to be lower power and materials processing mix, and those are the top ones.

With respect to the guidance, I gave similar guidance to last quarter on a pro forma basis, and we tried to incorporate that as much as we can.

So on the service, the smaller margin, is that more an artifact of those service revenues were stable, but higher margin service had declined? And so maybe once we get back to more normal production, let's say in the future, that you would see that those would return?

That is a correct statement, that the service revenue in itself wasn't down; but for example, service revenue in microelectronics was less than we had before, whereas service revenue in the other markets was higher than what we had before, and that gives you a negative margin impact.

Okay, and then on talking on the materials processing side of things, has there been any width of a recovery, in anything besides the really low power marking -- non-metal cutting?

I would say that the recovery, again, is taking place in customer dialogue, but it is still a very quiet marketplace right now. There's a lot of excess capacity in the higher power end of that market that needs to work its way through.

Okay. Thank you.

Sure.

Our next question comes from the line of Jiwon Lee with Sidoti & Company. Go ahead.

Yes, good afternoon. Just going back to that debooking, could you give us a little more sense as to which submarket that might have come from?

I said it came from microelectronics. It was a single customer that lead to the debooking.

Okay. Within that submarket -- that's what I meant, but --

We don't disclose that level of detail, Jiwon.

Fair enough. And then John, there's a lot of opportunities and activities happening in the larger display side of things. What are the opportunities that you guys are seeing in terms of the notebooks and TV side of the display?

Well, our emphasis has been in -- I'd say in two areas, or three areas. Obviously , the annealing process is something that we've long had a significant position in and we continue to enjoy that, and we are seeing activity there. Patterning and cutting are two other areas where there is capability; but it seems that there is ample capability in some of those areas and not others. So for example, as more and more mobile touch screens come out and [OLEDs] become more prevalent, the whole annealing market stands to benefit from that. Other parts of the market may be able to better match capacity and capability. So we're focusing on -- strongly on the annealing piece, but not losing sight on the others. But we think that the short-term action is on the annealing

Okay, and for Helene, understanding your restructuring dynamics and also your need to work down the inventory that takes a few more quarters, how should we be viewing your new breakeven point in terms of the top line? Hello, can you hear me?

Yes, yes, I'm here, Jiwon. I'm here. Let's see, we had said earlier that we would target our breakeven point under 100 million until we are through this inventory issue. It's going to take until then to get there.

Okay, that's fair enough. Thank you.

Our next question comes from the line of Ajit Pai with Thomas Weisel Partners. Go ahead.

Yes, good afternoon.

Hi, Ajit.

Hi, Ajit.

Good. A couple of quick questions. I think the first one is just looking at the margin structure of the industry right now, some of the settled commercial or manufacturers have talked about increasing pricing pressure. Could you discuss what you're seeing in that regard, and also whether the margins in this quarter were impacted by that or whether those are the two factors that you mentioned?

So one of the things that we tracked very closely, Ajit, is pricing, because as we started to do our gross margin analysis, obviously that's one of the things that comes to the forefront, and you quickly ask that question. We were not able to identify any significant changes in pricing in virtually any market, and we looked pretty closely at that. We see more impact from the change in mix that Helene alluded to earlier as being the gross margin culprit for us in the third quarter.

So when business comes bouncing back -- I know someone else asked that question as well -- you'd expect to get the sort of full operating leverage? You haven't given up any material pricing in this downturn? Is that fair?

We've been watching this, as I said, very closely; and there are opportunities or places where we've been able to increase pricing and places where we've had to concede some pricing. But overall, I'd say that the pricing has been remarkably stable through this downturn.

Okay, and then just moving to the uses of cash, your Company as a percentage of your market (inaudible) that has they material cash -- you have shown a propensity to acquire in the past and you've also shown a propensity to buyback your shares. Just given what the current context is, where your stock price is depressed but also there are lots of acquisition opportunities and you have sort of recently had a mixed experience trying to acquire a company and it's not going through, can you give us some color as to how you see things playing out in terms of acquisition opportunities? How close you are to potentially closing on some things and then also how you (inaudible) as a use of cash going forward?

So we do have a high-class problem in that we do have a lot of cash and we continue to be a very good cash generator. We are looking at all uses of cash, including acquisitions. I was talking to somebody recently and I said it reminds me of the children's nursery rhyme where you have to kiss a lot of toads to find a prince, and we've certainly done a fair amount of looking. Inheriting somebody else's problems is not the first thing that comes to mind for us, so we are looking for quality acquisitions. I think we also mentioned earlier that while we would tolerate short-term dilution, our preference would be that deals have to be accretive, certainly within the first year. So that's putting some fairly tight conditions around acquisitions, particularly when you're dealing with an uncertain revenue environment; and I would say more than anything else, that's what's made us cautious through the first half of this year in pursuing M&A activity, is it was really hard to validate or to project how an acquisition's revenue stream would perform.

With respect to buybacks, we did do a fairly substantial one a little over a year ago. It certainly feels a lot longer than that, but a little over a year ago. We're not opposed to using that as a second mechanism to deploy cash. We've also had some conversations internally, and we've heard from a number of shareholders, that they would not be opposed to dividends; and this, too, is being factored into the equation. I would say for the buybacks and for the dividends, we would like to see a little bit more stabilization in the market take place before we move down that path. And as far as the acquisitions go, when we have one that we like and we're ready to pull the trigger, then we will do it. We're not trying to rush something because we feel we have to do it tomorrow. There still remains enough uncertainty in the market that validating these business plans, especially for other companies, is a challenge.

Got it. And then one last question, which would be, just looking at the restructuring that you're doing right now and what you've announced, I mean, I'm sure depending on business conditions there might be additional actions; but the current restructuring that you've announced, when do you expect to have the first clean quarter of results where the full impact of the restructuring and benefits of the restructuring will be visible in the income statement?

Well, we had highlighted when we started the project that we were going to be doing various phases, and that that would take us roughly through fiscal 2010. As you've heard, we finished all the projects that were on the docket with the exception of the semiconductor transition, where we're bringing up capacity in Sunnyvale and we'll be closing down the facility in Finland. Given how important those devices are to our customers and to our total revenue, we need to make sure that we do that in a controlled fashion, and we think that that's going to take us mostly through fiscal 2010. Now the costs in any quarter, starting in December, will be considerably lower than what you've seen in the past. I think Helene may have mentioned that in the September quarter, I think we expect about $2 million of restructuring cost and that will drop further -- and I'll let her add a little bit more color to that if she wants to. Apparently not.

Okay, thank you.

Sure.

(Operator Instructions). At this time, we have no further questions in the queue. I'll turn the call back over to John Ambroseo for additional closing remarks.

Thank you, Britney. We certainly appreciate everyone's time and we look forward to talking to you either at one of the upcoming conferences that we're attending or during the next conference call. Thank you.